Terrance Heath

What the Rich Can Do With Their Tax Cuts

Filed By Terrance Heath | November 30, 2010 10:30 AM | comments

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Ya gotta love Alan Grayson. It's a shame he's not going to be in Congress anymore. That's one less Democrat with the guts to say what desperately needs to be said, though it may be impolitic. Here's hoping he won't go quietly.

His latest, "What the Rich Can Do With Their Tax Cuts," gives me some assurance he won't.

So conservatives don't want to give someone like Chrissandra Walker, one of the 2 million unemployed whose unemployment benefit extension the GOP killed in the House, $11,000 a year to keep her head (barely) above water. But they want to give every millionaire a tax cut of $83,000 a year?

We know that tax cuts offer the "smallest bang for the buck" in terms of spurring economic growth and reducing unemployment. Why? Because the wealthy don't spend their tax cuts.

Even the Wall Street Journal knows that the risk of tax cuts is that there's no guarantee the wealthy will invest their tax cuts "in ways that do nothing for the economy," like investing in emerging markets overseas or investing in gold. Neither creates many jobs back home. So, what can we do about it? Here's wat WSJ blogger Robert Frank offered.

Let's hope this doesn't happen. But the rich are far more likely to send their capital to China or India than they are lighting up $100 bills for a cigar.

As I've said before, we know how well "cut-taxes-and-hope-for-the-best" worked during the previous decade. The result was zero job creation. "Let's hope that doesn't happen," is more of the same. There's no guarantee it won't, and nothing we can do about it if it does but let's cut taxes anyway.

According to Moody's, spending by the wealthy is more likely to be driven by the ups and downs of the stock market than by income tax rates. Middle- and lower-income families spend differently, according to Paul Krugman.

...Now, you might ask why the same arithmetic doesn't apply to all taxpayers, not just the rich. The answer is that middle- and lower-income families are often cash-constrained, with their spending limited by their current income even if they have reason to believe they'll be doing better in the future. High-income families are much less likely to be in that situation. As summarized here (pdf), there's a lot of evidence suggesting that tax cuts for the rich will do less to promote spending than equal tax cuts for the middle class and below.

But in any case, it's the tax cuts for the top 2 percent of the population, with most of the benefit going to the top 0.1 percent, that are at issue. And they're terrible stimulus, delivering very little bang for the buck.

So, why opt for what's least effective? If middle- and low-income families spend more based on income (and expected income), then money directed at them -- whether through tax cuts, spending on job creation, or unemployment benefits -- is more likely to be spent, and thus re-enter the economy. And it will be spent on necessities and other goods and services provided by American workers.

Sufficient investment, then could make a huge different by increasing demand in the private sector, where corporations are currently sitting on $1 trillion in cash, waiting for demand to increase.

It's common knowledge that U.S. companies are sitting on a large pile of cash. Moody's estimates that pile to be worth $1 trillion. It must be a comfortable place to sit, too, because there seems to be little enthusiasm for whittling the size of the pile down.

There are a couple of reasons for U.S. corporations' reluctance to spend the cash. First, the shakiness of the U.S. economy, and the global economy in general, makes cash a necessity for survival. Second, consumer demand has been so weak that it makes little sense to invest more in order to grow when a company isn't running at full capacity anyway, and still can't sell the products it offers.

...That crisis has passed, but high unemployment, stagnant wages, falling housing values, and a tepid global economy remain. For a long time now, U.S. consumers just weren't spending any money. If no one is going to buy, why should companies expand? Corporate managers would indeed be negligent and profuse if they hired more people and expanded capacity in the teeth of all these negative factors.

Consumers aren't spending because they're worried. Companies aren't expanding because there's no reason to. Politicians are worried about short-term deficits and are not interested in more government spending to stimulate the economy.

I'm no economist, but it seems likely to me that there's a pretty decent chance that demand could grow enough that the private sector does start hiring again. Ultimately, then, public investment would spark private sector job growth.

So, tax cuts for the middle class, spending on job creation to put people back to work, and extending unemployment benefits pretty much guarantee that those who benefit will put that money back into the economy.

Direct investment in job creation removes the "Let's hope that doesn't happen" factor of tax cuts for the rich. If more middle- and lower-income Americans go back to work, they will earn paychecks. They will likely spend those paychecks on necessities like food, clothing, and shelter. They might even feel comfortable enough to eat out in a local restaurant once in a while. They could take vacations, enroll the kids in summer camp, shop in a local book store, go out for ice cream, buy a few items for the house, rehire people who used to work for them, etc. And, they'd be paying taxes again, including local and state taxes that would go to supporting local schools, police and fire services, road maintenance, etc. This activity would support a whole lot of jobs, and maybe even create a few.

The return on investment could be far greater than tax cuts for the wealthy, which may or may not be invested in ways that help the U.S. economy.

So, why would be opt for "the least bang for the buck," and just "cut taxes and hope for the best" again?


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So wait, we are going to cut off unemployment for 2,000,000 people to cut the deficit , but at the same time we are going to extend or give tax cuts? which will do EXACTLY the same thing?
I don't get it, just makes no sense - it seems the lower class and down and out are being royaly screwed!

Bonnie Smith
COO/Director FXP
http://www.forexpulse.com

I want to have Alan Grayson's baby.

Me too!

I hope he has a long career in politics after this defeat. He's a guy we need to bring back pronto!

All Democrats, especially the ones inside I-495 should be role modeling Alan Grayson!

I prefer giving each homeless person a low mileage, E-class Mercedes Benz to live in.

Or a home. Maybe a home.

Bill Perdue Bill Perdue | December 1, 2010 4:13 AM

Mass homelessness is created by government enforced austerity, wage freezes and declines and by mass unemployment.

The current Depression began in 2007. By 2008 escalating poverty, unemployment and homelessness began to be registered. The Bureau of Labor Statistics U-6 unemployment rate (1), the only one that attempts to measure all the unemployed and underemployed has hovered around 17% for the last fourteen months, well into Depression territory. http://portalseven.com/employment/unemployment_rate_u6.jsp

Among the major worker groups, the unemployment rate for teenagers is three times that for adult men and women. For African Americans it's a bit under double the rate for Euro Americans and about one and one half times the Euro American rate for Latinos.

This level of unemployment will crush the economy over time. If the Democrats and Republicans don't extend unemployment insurance indefinitely and at trade union rates while setting a 90% plus tax rate on the looter rich (2) the economy will tumble head over heels into levels of economic collapse and unemployment not seen since the early 1930's.
http://i242.photobucket.com/albums/ff90/AvaBrendan/U3U5UnemploymentGreatDepression.png (By AvaBrendan)

The ultimate solution is a series of constitutional amendments guaranteeing good wages and benefits or workers, the unemployed, retirees and students at trade union levels, good housing and free educational and socialized medicine. We also need a constitutional amendment placing confiscatory taxes on the rich. High prosperity historically is generated by high taxes on the rich. As their taxes go down both their wealth and poverty, homelessness and unemployment increase.
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(1)There are two major reporting's of unemployment rates according to the Bureau of Labor statistics. They are the "U-3: Total unemployed, as a percent of the civilian labor force (official unemployment rate)" and the far more accurate "U-6: Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers." http://www.bls.gov/home.htm

(2) The top marginal tax rate was reduced to 58% in 1922, to 25% in 1925, and finally to 24% in 1929. In 1932 the top marginal tax rate was increased to 63% during the Great Depression and steadily increased, reaching 94% (on all income over $200,000) in 1945. During World War II, Congress introduced payroll withholding and quarterly tax payments. Top marginal tax rates stayed near or above 90% until 1964 when the top marginal tax rate was lowered to 70%. The top marginal tax rate was lowered to 50% in 1982 and eventually to 28% in 1988. However, in the intervening years Congress subsequently increased the top marginal tax rate to 35% (the top marginal tax rate as of 2007). http://wiki.answers.com/Q/What_was_the_highest_tax_rate_in_US_history#ixzz16qcsYxdr